Dollar, EURUSD, USDCNH and S&P 500 Talking Points:
- In a range of high-profile fundamental themes, the promise – if not the expectation – of US stimulus seems a lingering hope for risk assets
- Alternatively, growth measures continue to highlight fundamental troubles with the blue chip companies announcing mass layoffs/furloughs while data cools
- Can the Friday NFPs offer the definitive spark necessary to top the market into a true break and eventually trend?
Risk Trends Spin Tires as Liquidity and Fundamentals Present the Proper Trend
Through Thursday, general risk trends were frustratingly resilient to a restoration of market depth and the prevalence of systemically-important event risk. These conditions beg the question: is a major development in US stimulus or perhaps the forthcoming September NFPs capable of reinstating a more productive market trend through Friday or even beyond? Inevitably, over a long enough time frame, any quiet will be broken with greed or fear motivating markets. As it stands now, however, the markets are awaiting their cue. As a preferred yet imperfect measure of enthusiasm, the S&P 500 stage a fourth consecutive session of virtual inactivity. Aside from the Friday to Monday gap, this market leader is virtually unmoved with no measurable volatility this week to speak of. As prominent as this situation is, it is unlikely to last.
Chart of S&P 500 and 50-Day Moving Average with 4-Day Range and ATR Below (Daily)
Chart Created on Tradingview Platform
Though we have only closed out the first day to the month of October, this is a month renowned for both its liquidity and volatility. In seasonality terms, September is the only calendar month of the year that has averaged a loss from the benchmark US index stretching back to 1980. That seems to align to our situation in 2020. That said, October has averaged out a gain. Directionality is a function of circumstances and differences year to year are meaningful. On the other hand, the backdrop of the market environment is more consistent. As it happens, this month averages the heaviest volume from the S&P 500 over the whole year while the VIX typically peaks. Between these two pillars, the chances of a fundamental blaze catching is worryingly high.
Chart of Monthly S&P 500 Change and Volume with VIX (Monthly)
Chart Created by John Kicklighter, Data from Bloomberg
The Fundamental Sparks Fly
Ultimately, the charge behind the markets is more likely to arise from a systemic fundamental catalyst. On the docket, this past session, we were presented with a few high profile candidates that fell short of the mark. The ISM manufacturing report for the past month for example slipped unexpectedly (55.4 versus 56.4 expected), but that did send any investors reeling. If anything the market’s unspoken anticipation of a US stimulus infusion stands represents a more weighty event. Despite ongoing headlines over discussions between the Treasury Secretary and the House majority leader on a possible $2.2 trillion follow up to the expired CARES act, the markets must be growing increasingly accustomed to impasse. Yet, is approval or disappointment the more potent scenario here?
Chart of US ISM Manufacturing and Service Activity Surveys Over S&P 500 (Daily)
Chart Created by John Kicklighter, Data from Bloomberg
While the latent hope of a US stimulus is a capable catalyst, it is easy to draw out anticipation before recognition of an approval or failure is secured. That can cater to hopes for an extended period, but I believe a disappointment would be the more potent outcome. This is particularly true when we consider the continued erosion of potential associated to news such as the mass layoffs and furlough at blue-chip companies. Disney announced 28,000 employees were being let go this week while two of the largest US airlines (United Airlines and American Airlines) have furloughed 32,000 employees in the absence of additional stimulus for payroll support. This is a practice in expectation fending against reality. It is possible to shake complacency though with a more definitive data point. Friday’s US NFPs has the right resume for the job. It is more capable in a disappointment scenario, but be open to various outcomes.
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Chart of Total Nonfarm Payrolls in the United Sates (Millions, Monthly)
Chart from Federal Reserve Economic Database, Data from BLS
Moving into this final trading day of the week there seems as much opportunity for the Dollar as US indices. A shortcoming in follow up US stimulus and the uncertainty of US employment represents a more black-and-white reality for the perceived value of the Greenback relative to counterparts than a readily skewed perspective of risk trends. With the proper application of fundamental influence, technical scenarios like EURUSD’s flirtation with former support in a head-and-shoulders neckline carries serious potential.
Chart of the EURUSD with 50-Day Moving Averages (Daily)
Chart Created on Tradingview Platform
From a fundamental perspective, the world’s two largest developed economies are pursuing an increasingly overt two-speed effort to combat economic trouble. The ECB dove into negative rates and continued to expand its stimulus efforts while the Fed dragged its feed and stuck to its low. On the fiscal side, Europe’s massive PPEP efforts in 750 billion central bank support and 1.07 trillion budget shows incredible scale. But is this a trend for the Euro to lose?
Chart of EURUSD Overlaid with ECB-Fed Balance Sheet Ratio
Chart Created by John Kicklighter, Data from Bloomberg
Another key Dollar to pair to watch in my book is USDCNH. This cross has pushed to a new 17-month low on an intraday basis this past session. There is serious debate over what Chinese authorities are doing in the backdrop of the exchange market to influence the Yuan, but we don’t have to believe that proactive appreciation is underway to understand this drive is significant. Simply ‘allowing’ the Chinese currency’s rise in this manner is remarkable. Are authorities seeking to reinforce a view that the world’s second largest economy is in a better position and thereby an investment oasis in arid times?
Chart of USDCNH with 50-Day Mov Avg and 2-Day Moving Average (Daily)
Chart Created on Tradingview Platform
If you want to download my Manic-Crisis calendar, you can find the updated file here.
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